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The SEP licensing conundrum

Negotiations over patent licensing are tricky. One bad sign is if parties start discussing standard-essential patents in detail

Michele Herman of Metabl and Richard Taffet of Morgan Lewis staged a mock negotiation yesterday as part of the session called "The Nuts and Bolts of Licensing: Strategies for Negotiating to Yes."

Negotiations over patent licensing are tricky enough. But Herman said it's a bad sign if parties start discussing standard-essential patents (SEPs) in detail.

She said when SEPs are involved, it is typically no different than any other portfolio negotiation. The biggest exception is when parties are unable to reach agreement.

"There is a conundrum when SEPs are involved," she said. "If you are not getting to that final compromise, this is where we see SEPs specifically identified and discussed. The patent owner might want to say, 'Hey, I have standard essential patents, you better take a license.' But as soon as he does that, the potential licensee says, 'Well, you have a FRAND commitment and you are not meeting it.'"

She added, "At the end of the day, if they are talking about the specifics of SEPs, they are probably not compromising – they are getting further away from each other and toward litigation."

In addition, a license to non-SEPs may terminate, but there may be restrictions on terminating a SEP license for customary reasons such as bankruptcy, or failing to meet performance requirements or milestones. A license to non-SEPs may be exclusive, but a SEP license may not be exclusive.

The "cost" of a SEP license depends on all the terms and conditions, Herman stressed. These include: the nature and amount of non-SEPs also being licensed; the fee and/or royalty structure; and the value of early adoption, volume, grant backs and other business agreements.

Herman concluded that the value of the portfolio is based on the entirety of the deal and what the parties bring to the table. "As the parties negotiate the terms and conditions, and compromise on them, their respective views on the specific monetary terms will change. The parties generally have a greater incentive to compromise when one party alleges infringement or SEPs are involved," Herman said.

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